We Think RedPlanet Berhad (KLSE:RPLANET) Can Manage Its Debt With Ease

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that RedPlanet Berhad (KLSE:RPLANET) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

How Much Debt Does RedPlanet Berhad Carry?

As you can see below, RedPlanet Berhad had RM8.12m of debt, at December 2024, which is about the same as the year before. You can click the chart for greater detail. However, it does have RM16.1m in cash offsetting this, leading to net cash of RM7.99m.

A Look At RedPlanet Berhad's Liabilities

The latest balance sheet data shows that RedPlanet Berhad had liabilities of RM24.0m due within a year, and liabilities of RM10.4m falling due after that. Offsetting these obligations, it had cash of RM16.1m as well as receivables valued at RM15.9m due within 12 months. So it has liabilities totalling RM2.28m more than its cash and near-term receivables, combined.

Of course, RedPlanet Berhad has a market capitalization of RM42.6m, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, RedPlanet Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

Check out our latest analysis for RedPlanet Berhad

In addition to that, we're happy to report that RedPlanet Berhad has boosted its EBIT by 68%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since RedPlanet Berhad will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While RedPlanet Berhad has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. In the last three years, RedPlanet Berhad's free cash flow amounted to 45% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that RedPlanet Berhad has RM7.99m in net cash. And we liked the look of last year's 68% year-on-year EBIT growth. So we don't think RedPlanet Berhad's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that RedPlanet Berhad is showing 4 warning signs in our investment analysis , and 3 of those are a bit concerning...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.